Trump Backs Down on Mexico Tariffs — and That’s Good News for GM and Ford – Barron’s



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allen.root@dowjones.com


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President Trump’spunitive tariffson Mexicowon’t go into effecton Monday, June 10 after all—and that’s great news for the car business, which would have been at the epicenter of the tariff impacts.
General Motors

(GM),
Ford Motor

(F) and others assemble cars in Mexico, and lot of parts are shuttled back and forth between both countries.Car stocks could have been hurt, but now they should bounce because of the new deal with Mexican officials.

The initial bad news, on May 30, came via tweet.

As did the favorable news on Friday.

Investors in the car sector should breath a sigh of relief. The potential impact of the tariffs would have been big.

“This isn’t a situation where a couple of car models have tariffs slapped on them, this is a much bigger deal,” explains Joe Wiesenfelder, executive editor at Car.com, in an interview withBarron’s. “Any amount [of tariffs] matter because the market is already a little bit soft.”

TheCenter For Automotive Research, or CAR, predicted at 5% tariff rate the price of a new vehicle assembled in the U.S. would rise $250 and at 25% tariff rate the price of a new car assembled in the U.S. would rise at least $1,100. All cars, even cars assembled in American plants, use parts imported from Mexico.

For cars assembled south of the border and shipped north, CAR estimated prices could increase $1,000 at a 5% tariff rate and $5,400 per vehicle at a 25% tariff rate.

Avoiding all that should help the industry, which has struggled this year. The Russell 3000 Auto & Auto Parts Index is down 0.5% year to date, worse than the 11% rise of the
Dow Jones Industrial Average.
What’s more car companies in the index trade for less than 10 times estimated 2019 earnings, an 18% discount to their historical average and a 39% discount to stocks in the Dow.

Car company valuations might look attractive, but the random nature of the current tariff policy is weighing on investors’ attitudes toward the sector. “Auto makers can adjust, they just need to know the rules,” says Wiesenfelder.

That likely goes for investors as well. Markets love stability. They will want to know the rules of the tariff-game before jumping back into the sector. Hopefully, when the new U.S.-Mexico-Canada trade agreement is ratified by Congress, the car sector, and the car stocks, will get out of neutral.

Write toAl Root at[email protected]

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